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Meals or Entertainment? IRS offers Guidance.

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Meals or Entertainment? IRS offers Guidance.

The IRS gave notice it intends to publish proposed regulations clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible expenses. It also provided guidance on the treatment of expenses for certain business meals. Taxpayers may rely on this guidance until the proposed regulations become effective.

Under the notice, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present when the food and beverages are furnished;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. The food and beverages are provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

The notice includes several examples.

  • Doug invites Marty, a business contact, to a baseball game. Doug purchases tickets for both to attend the game. While at the game, Doug buys hot dogs and drinks for Marty and himself.

The cost of the game tickets is an entertainment expense and is not deductible by Doug. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not a disallowed entertainment expense.

Doug may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

  • Bob invites Tony, a business contact, to a basketball game. Bob purchases tickets for Tony and himself to attend the game in a suite, where they have access to food and beverages.

The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages. The basketball game is entertainment and the cost of the game tickets is a nondeductible entertainment expense. Because the food and beverages are not purchased separately from the game tickets and the cost is not stated separately on the invoice, the cost of the food and beverages also is a nondeductible entertainment expense.

None of the cost of the basketball outing is deductible by Bob.

  • Glenn invites Kevin, a business contact, to a football game. Glenn purchases tickets for Kevin and himself to attend the game in a suite, where they have access to food and beverages. The football game tickets separately state the cost of the food and beverages.

The cost of the game tickets, other than the separately stated cost of the food and beverages, is a nondeductible entertainment expense.  The separately stated cost of the food and beverages is not an entertainment expense.

Glenn may deduct 50 percent of the expenses associated with the food and beverages provided at the game.

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